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Analysis and Prediction:

Date of publication: February 12, 2018 | Author: Tim Clayton

Last Week’s Summary

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Stock market trends dominate currencies

Sharp losses in US equity markets dominated global markets during the week with the S&P 500 index declining over 4% on Monday with another decline of over 3.5% on Thursday and a weekly loss of over 5.0%, the sharpest weekly decline for two years.

Markets in Europe and Asia also declined sharply for the week.

There were concerns that inflation pressures were increasing, especially in the US after the stronger than expected employment data.

Fears over inflation pushed bond yields higher and higher yields were an important factor pushing equity markets lower.

There were concerns that higher inflation would force the Federal Reserve to increase interest rates more rapidly while higher yields also have a direct negative effect as dividend yields become less attractive.

During the past few years, traders have sold low-yield and defensive assets in order to invest in high-yield and high-risk assets. Fears over higher yields have tended to reverse this trend a fear is replaced by fear.

Support for safe-haven currencies

The sharp downturn in equity markets triggered fresh demand for defensive assets such as the Japanese yen and Swiss franc, although the impact was offset to some extent by higher bond yields. The dollar also gained some defensive support.

Latest US market report from Reuters


The US economic data releases had very little impact during the week, although there was further evidence of a strong labour market with the 4-week moving average reading of jobless claims declining to the lowest level since 1973.

Federal Reserve officials played down the impact of losses in stock markets and continued to call for gradual increases in interest rates.

The dollar recovered ground overall with the largest weekly gain for over 12 months.


The Bank of England held interest rates at 0.5% at the latest policy meeting which was in line with consensus forecasts.  GDP growth forecasts were risen up slightly and the bank warned that there was very little spare capacity within the economy.

In this context, there was a warning that interest rates would be likely to be increased again earlier than expected at the previous meeting and that rates would need to increase further.

These warnings triggered sharp Sterling gains with expectations of a possible interest rate increase in May. Gains reversed later in the week with the currency undermined by a slide in risk appetite. Sterling was also undermined by renewed political concerns as EU Brexit Chief Negotiator Barnier warned that a transition deal was not a given.

GBP/USD declined to the 1.3800 area from highs above 1.4150.


Euro-zone data releases had little overall impact and developments elsewhere in the global markets tended to dominate.  There was a net reduction in long Euro positions and EUR/USD declined to the 1.2250 area from above 1.2400.


The Australian Reserve Bank left interest rates on hold at 1.50% following the latest policy meeting, although it was cautious surrounding the outlook with concerns that a strong currency would curb inflation.

The Reserve Bank of New Zealand also maintained rates on hold at 1.75%.

Commodity currencies were undermined by the slide in risk appetite with AUD/USD dipping to lows below 0.7800.

Next Week’s Forecast & Events

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Stocks and bonds will remain in focus

After heavy selling pressure during the previous week, stock-market developments will continue to have an important impact on all asset classes including currencies.

Trends in bond markets will also be a very important given the direct impact on both equities and currencies with underlying volatility levels likely to remain elevated.


US inflation trends will be an important focus during the week with markets concerns that underlying pressures are building a crucial factor in undermining both bond and equity markets. In this context, the inflation releases will be very important with the consumer prices data due on Wednesday and producer prices data on Thursday.

If the inflation data is stronger than expected, there will be fresh upward pressure on bond yields which would be likely to trigger fresh turmoil in stock markets and currencies.

The New York Empire manufacturing data and Philadelphia Fed survey will both be released on Thursday.  Evidence on growth trends will be important with evidence on prices also important.

Comments from Federal Reserve officials will be monitored closely, especially if there is further downward pressure on equity markets.  

If US yields continue to move higher the most likely outcome is that the dollar will tend to strengthen.


The UK CPI inflation data will be released on Tuesday with the data giving fresh insight into potential interest rate trends. Any renewed increase in the rate would increase pressure for the Bank of England to tighten raise interest rates quickly. The latest retail sales data will also be released on Friday with comments from Bank of England members also watched closely.

Political developments will also remain important as markets monitor Brexit developments. Any further increase in tensions and further rows surrounding a potential transition deal would tend to trigger further Sterling selling. The main feature is likely to be erratic Sterling trading as markets react to individual headlines.


Euro-zone economic data releases are unlikely to have a significant impact, but comments from ECB officials will continue to be monitored very closely.

Political developments within the Euro-zone will also be significant ahead of March’s Italian general election.


The latest Australian unemployment data is due for release on Thursday, although trends n risk appetite are likely to have a bigger impact on commodity currencies.

Currency Forecast for Next Week

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 timTim Clayton is a market analyst with more than 20 years of experience in the financial markets, with particular focus on currencies. Holds an economics degree from University of New York. Writes for multiple publications including and SeekingAlpha so he is on top of all the happening in the world of currencies and macro-economics. 

Information expressed in this article and on as a whole does not constitute as financial advice. If you decide to make any actions based on the information you read, we shall not be held responsible.



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